Southwest Airlines Co.
) witnessed a 1.5% year-over-year drop in traffic - that is
measured revenue passenger miles (RPMs) - for November 2012.
During the said period, the company flew 8.1 billion RPMs,
against 8.3 billion RPMs in the second last month of 2011.
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On a year-over-year basis, consolidated capacity (or available
seat miles/ASMs) increased 0.4% to 10.2 billion. The load factor
(percentage of seats filled by passengers) deteriorated to 80.0%
from 81.6% in the prior-year month. Passenger revenue per
available seat mile (PRASM) rose 1% year over year last month.
For the first eleven months of 2012, Southwest generated RPMs of
94.7 billion (down 1% year over year) and ASMs of 117.7 billion
(down 0.3% year over year), while load factor was 80.5%, down 50
Dallas, Texas based Southwest is the largest U.S. low-cost
carrier that provides scheduled air transportation in the United
States. The company primarily provides short-haul, high
frequency, point-to-point and low-fare services serving more than
70 cities across states.
We expect the company to benefit from its cost leadership
position, strong balance sheet, favorable cost-structure,
flexibility, network optimization, fleet modernization, and
increasing revenue initiatives. Along with these productive
steps, Southwest is expected to report strong revenue and
earnings growth in the coming quarters based on the All-New Rapid
Rewards program and increased ancillary product offerings such as
EarlyBird check-in, unaccompanied minor travel and pet fees.
Nevertheless, high operating costs like fuel, maintenance,
salaries, wages and airport fees, new advertising policy along
with intense competition from other strong industry players such
United Continental Holdings Inc.
Delta Air Lines Inc.
) and heavy investments are expected to limit the earnings upside
potential of the stock. Moreover, we believe that Southwest will
take some more time to fully reap the advantages of the AirTran
We maintain our long-term Neutral recommendation on the company.
For the short term (1-3 months), the stock retains a Zacks #3